Plant Reliability in Monopolies and Duopolies: A Comparison of Market Outcomes with Socially Optimal Levels

This chapter investigates the interaction between system availability/reliability, economic restructuring, and regulating constraints. Specifically, the effects of restructuring on electricity markets are analyzed via the interplay between market structure and the incentives provided to power generators to maintain plant availability and reliability. Here, plant reliability is defined as the probability of plant operability under the assumption that this probability is an increasing function of the plant maintenance expenditure. In this framework, three market structures are studied, which are monopoly, duopoly, and public ownership or perfect regulation where maintenance decisions are made by a regulator seeking public interest. To capture the responsiveness of the demand for a given market price, a linear downward-sloping demand curve has been assumed. Based on these assumptions, the authors derive a socially acceptable level of maintenance expenditure to achieve a given level of reliability for the three foregoing markets. For each type of market structure, the authors compute the level of plant reliability and show that the more competitive the market structure is the higher will be the level of reliability. Also, they show that a regulator seeking the public interest would prefer an even higher level of reliability than the one provided by firms with pricing (or market) power. Paradoxically, a multi-plant firm with identical plants that produce power for the same market may optimally choose different reliability level for each one of the plants.